About 20% of employees are currently subject to non-compete agreements, and there has been a movement to ban or at least limit their use. In May 2024, the FTC issued a rule that would ban employee non-compete agreements nationwide. It was supposed to go into effect on September 4, in what would have been the first national ban. Before that could happen, there were several lawsuits challenging the FTC’s authority to make such a rule.
FTC’s Non-Compete Rule Struck Down in Federal Court in Texas
Ryan, a tax services firm, the U.S. Chamber of Commerce, and other business organizations quickly brought a lawsuit – Ryan LLC v. FTC – in Texas federal court challenging the FTC’s rule.
In July, Ada Brown, the U.S. District Judge deciding the lawsuit, partially blocked the FTC’s rule from taking effect, writing that the FTC lacked the authority to make such a broad rule. The judge’s blockage of the rule was partial because it only applied to the plaintiffs in the case and only until the case was resolved with a final ruling. At the time, the judge held off on making any ruling about the nationwide effect of the rule.
Then, on August 20, the judge issued her final ruling, where she struck down the FTC’s rule completely, with the same reasoning she had used in the earlier partial blockage. She called the FTC’s rule “arbitrary and capricious,” and wrote that the FTC did not present evidence showing why it needed to impose such a broad rule instead of one that would be more targeted to harmful agreements.
Because of this final decision in Texas, employers nationwide no longer have to abide by the FTC rule that was set to go into effect on September 4. The FTC said it is seriously considering an appeal.
Meanwhile, similar cases are being heard in other jurisdictions.
FTC’s Rule Both Upheld and Struck Down in Other Courts
In July, a Philadelphia District Court Judge, hearing a similar lawsuit – ATS Tree Services LLC v. FTC – came to the opposite conclusion, denying the plaintiff’s request for a preliminary ban. She wrote that the FTC has the power to block anticompetitive practices, and that includes noncompete agreements because they impair competition for labor.
However, in a similar federal case in Florida – Properties of the Villages v. FTC – the District Court Judge banned the FTC rule from taking effect, although only applying the ban to the lawsuit’s plaintiff, a real estate broker. He pointed to the question of whether the FTC has sufficient authority from Congress to make the rule, given its huge economic impact.
The Arguments For and Against a Non-Compete Ban
In the Texas and Florida cases, the judges ruled that the FTC doesn’t have the authority to make the kind of rule that it did. Beyond questions of the FTC’s authority, opponents of non-compete bans argue that the government is overstepping its bounds by trying to micromanage businesses. They also say the bans are harmful to businesses that need to protect their trade secrets from being given to their competitors.
Supporters of a ban argue that it is unfair to employees, especially ones who are low-income, because it keeps them tied to their present employers and prevents them from moving up by working for other companies. Beyond the harm to workers, they say, the stifling of employee mobility limits competition, which harms the economy as a whole.
What This Means for the Future Legality of Non-Compete Agreements
The FTC’s fight to ban non-competes is unlikely to be over soon. Beyond a probable appeal of the Texas case, the split in decisions could take the case to the Supreme Court. Whatever the ultimate outcome, there may be other ways to craft a federal ban on non-competes that could bypass questions of the FTC’s authority. November’s election is also likely to have an effect.
Meanwhile, there is a lot of activity against non-competes in various states. Employers should stay alert to developing news. While they are not now required to follow the FTC’s rule, the situation could change locally, and employers should anticipate that possibility and be prepared.
The FTC has also said that the Texas ruling does not limit its ability to take enforcement action against non-competes on a case-by-case basis.
New York and Other States’ Positions on Non-Competes
In the summer of 2023, the New York State legislature passed a bill that would ban new non-competes. However, in December, the governor vetoed it because of disagreements over which high-income employees should be excluded. It’s likely the legislature will try again, with a good chance of having more success the next time.
If it does succeed, New York will join California, North Dakota, Oklahoma, and Minnesota, which currently do have laws banning non-competes. Six other states have legislation pending that will do the same. And about a dozen other states impose limitations, though not total bans, on their use. Additional states are likely to follow, as there is a groundswell of opinion against non-competes, especially for low-wage workers. Even without a nationwide ban, a similar effect may eventually come about piecemeal, state by state.
What Businesses Can Do
Given the uncertainty about the future legality of non-compete agreements, employers should consider other ways to protect their intellectual property, such as non-solicitation agreements, confidentiality agreements, copyrights, patents, and trademarks. New York State employers, especially, should be prepared for some kind of non-compete ban in the future, but employers in other states should be thinking ahead as well.